5 Retirement Planning Tips in a Down Market

I’m honored to write the first blog post for the Spokane Financial Advisors Network. One of my specialties is helping clients prepare for retirement. Given all the volatility in the stock market in 2022, this blog post lists the top five things you can do right now to prepare for retirement; whether retirement is in five years or twenty years.

1. Have a Plan

Having a comprehensive financial plan is critical because it helps guide you during market downturns. Investing is a profoundly emotional experience. When I work with new clients, I have them fill out a risk tolerance assessment form. One of the questions on that form is, “If your portfolio decreases by 15% in a short period of time, what will you do: buy more, do nothing, or sell out of your positions?”. Most people say that they would do nothing or buy more when faced with a downturn of 15% when answering this theoretical question. This past year, we’ve seen incredible volatility in both the stock and bond markets. A portfolio with losses of 15% this year is very realistic depending upon your asset allocation. For many, the theoretical question about risk tolerance became real this year. Now faced with the real life situation, many people are tempted to veer from what they know is best for their financial life.

Having a plan helps you during times of increased volatility because your asset allocation should match your risk tolerance and time horizons. A good plan involves having a balance of cash, short-term assets, and long-term assets that match your personal financial needs. During a market downturn, you should have enough cash to meet your short-term liabilities (like paying a mortgage and your bills) without having to touch your short-term and long-term assets. Having a good comprehensive plan anticipates down markets, which enables you to make calm and measured decisions about your finances, instead of rash, emotional decisions.

2. Make Contributions

Down markets can be a great time for you to make contributions to your qualified retirement plan. Although it seems difficult to put more money away when there is so much uncertainty in the markets, buying assets at lower prices can increase your long-term returns on investments. No one has a crystal ball in terms of future returns, but sustained investing over a period of time with a plan should help you reach your goals.

3. Use Dollar Cost Averaging

Consider utilizing dollar cost averaging (making sustained monthly contributions to your qualified retirement accounts throughout the year) during times of heightened volatility. Some people argue that lump sum investing (putting your whole contribution in at once, usually in the beginning of the year) has a greater financial performance than dollar cost averaging because it has more time in the market. However, one of the downsides of lump sum investing is experiencing buyer’s remorse. For example, if you put your whole annual contribution in on January 3, 2022, you were probably pretty disappointed to see your investment drop during the volatile markets this year. For some people, this can be such a negative experience that they don’t make contributions in the future for fear of losing money or they try to time the market.  

The stock market is always going up and down. Dollar cost averaging can help you minimize your negative experiences, help you stay in the market, and help you resist trying to time the market. The most important thing is staying in the market and making regular contributions. Eliminating buyer’s remorse helps you stay motivated to reach your retirement goals.

Here’s a helpful article from FINRA about the pros and cons of dollar cost averaging.

4. Consider Roth Conversions

In down years, it might be beneficial to convert traditional IRA’s to Roth IRA’s to save on taxes in the long run. Roth IRA’s are tax-advantaged accounts that house after-tax contributions. Withdrawn money from a Roth IRA is tax-free (so long as you are fifty nine and a half and you’ve held the account for five years). You can convert traditional IRA’s with pre-tax contributions into Roth IRA’s. When you do the Roth conversion, the conversion amount is included in your gross income for that tax year. In down years, it may be smart to convert your traditional IRA to a Roth IRA because the tax hit is minimized if your account values are lower.

Deciding when to make a Roth conversion can be complex and is specific to your individual circumstances. Ask your advisor if this might be a smart move for you.

5. Work with a Financial Planner

One of the best things you can do in a down market is work with a financial planner.

• We all have biases which impact how we handle our finances and investments. One of the best ways to hedge against your biases so that you don’t make unwise financial decisions is to have someone in your corner who is looking out for your best interests.

• An experienced investment manager should be privy to tactical shifts in our current changing economy to help you make money.

• Hiring a financial planner in a down market is the perfect time so you can clarify your goals and prioritize your resources to reach those goals.

If you don’t have a financial planner or are looking for an excellent financial planner, there are seven qualified planners listed on this website. Click on the “Our Advisors” button to read their profiles and schedule a meeting with them.